Tan Kin Lian's Blog: Critical Illness Policy for $250,000

Wednesday, December 19, 2007

Critical Illness Policy for $250,000

Insurance agents like to their clients to insure $250,000 for a "whole life" critical illness policy. The tell the clients that you need $250,000 to provide loss of income for 10 years. Why?

The answer: About 18 months of premium goes to pay the commission to the agent and his managers, and the expenses and profit of the insurance company. To insure $250,000, the monthly premium is $500 for a person at age 30. About $9,000 is taken away from your savings to pay the various parties.

If the monthly premium of $500 is invested to earn 5% per annum, it will accumulate to $250,000 within 23 years. You can be 100% sure of getting this sum in 23 years (based on 5% investment return). Compared to this certainty, the proportion of people likely to suffer a critical illness within 23 years (and make a claim of $250,000) is between 5% to 10%.

If you buy the "whole life" critical illness policy, how much is the cash value at the end of 23 years? My estimate is $180,000 (but you can check it out). The cost to you over 23 years is a staggering $70,000.

If you wish to insure for critical illness, take a low cost insurance (like Term insurance but extend to include critical illness) to cover 25 years only. The premium is quite small.

Note: The charges under the Living policy from NTUC Income is lower than the market, so the cost is lower than the example shown above. But, it is still quite high, compared to the "Buy low cost insurance and invest the difference".

6 comments:

Anonymous said...: Dear Mr Tan. I am an financial planner. I do not earn $9,000 for selling the critical illness policy.

I earn a lower amount, and it is spread over a few years. Furthermore, it is a lot of hard work to get customers to buy the life insurance policy.; December 19, 2007 11:19 AM
Anonymous said...: I find it obscene that the insurance company and agent should take away so much money from my policy.

$9,000 is a lot of money!

Even if the agent does not earn all of it, the agent must have earn at least half of this sum.

$4,500 for a few days work to sell an insurance policy to me? And to confuse me with a lot of emotional non-sensible messages???

No wonder the insurance agent works so hard to sell the life insurance policy !!!

No wonder, many people run away from insurnce agents!; December 19, 2007 11:53 AM
Anonymous said...: Now you know, eh? Commission is not obscene to the agents. The more the better. The problem is not the agents.The problem is you or us.Without you or us they don't exist.Because we willing victims, conspiring to cheat ourselves. So don't blame them for earning high commission.They got the skill.; December 19, 2007 11:17 PM
Priyadi said...: "Dear Mr Tan. I am an financial planner. I do not earn $9,000 for selling the critical illness policy."

it is likely that a portion of that money goes to the person that referred you to the 'business'.; December 20, 2007 8:37 PM
daniel said...: sometimes we look at insurance and we think we pay alot for it. If we were to ask ourself if we drink a cup of starbucks, go for a restaurant meal. How much is the actual material or raw material cost. 10 percent of less? the rest goes into distribution and other areas. And did we complain abt that.. think abt it....; December 21, 2007 11:55 PM
Anonymous said...: This is not comparing apple for apple.
If that was your first experience drinking at starbuck and you KNEW what to expect and you found that it was a ripped off,not value for money, you wouldn't come again.Starbuck could only fleece you once and not another time. The contract was short and the cost not big.
But if you buy insurance there are many factors to consider before you enter into a contract. MANY people are CLUELESS of what the insurance really is and how they work for them. In the first place insurance agents DON"T KNOW much about insurance how can you expect the poor customer to know insurance in just an hour. The product cannot be tested. Whether the products work for you is not immediately known and only known many years down the road.
The complain against insurance agents is that they are not interested in the clients' interest
other than thier own pockets. Very often there are better alternatives instead agents sell the ones that pay the most commission.This is unacceptable. From the postings you can see agent don't want to sell term insurance which addresses clients' needs more efficiently and effectively. If they recommend APPROPRIATE products , no complain.
The problem is that they don't. There is conflict of interest. If not, how come tom, dick and harry, mary and ah beng and ah lian are in this business because they can get away with it and you don't need much selling skill. You need open your mouth like tissue paper sellers at hawkers centre with a 2 word presentation.; December 22, 2007 10:52 AM